FE Trustnet asked a number of industry commentators where investors should be positioned in three key stages of their life – career establishment, retirement preparation and retirement itself.
Establishing your career
The first question investors need to ask themselves is why they are saving in an ISA, according to Patrick Connolly, head of communication at AWD Chase de Vere.
“If it is longer term, you may be planning towards your retirement, or in the shorter term to pay off the deposit on your mortgage,” he said.
Connolly says that the cash ISA allowance should be used for any shorter-term goal – such as next year’s family holiday or saving for a car.
"Looking to the future and choosing the right asset allocation, you should look towards combining a pension and an ISA. Investors in their 20s and 30s have at least 30 years of working life ahead of them so they can afford to take a higher level of risk than others," he explained.
"These investors are also probably going to be investing through regular premiums and not lump sums, so topping up equity exposure over a long period of time is a good choice."
Adrian Lowcock (pictured left), senior investment manager at Hargreaves Lansdown, argues that income has a place for younger investors as well.
"I think you should have a good deal of exposure to corporate bonds and equity income, and that’s not just for older investors," he said.
"With equity income you will receive the dividends and if you are holding them for 20 to 30 years as you plan for retirement you can reinvest them to achieve that compounding effect."
"If you have a longer-term horizon then you can accept a little more risk and look for exposure to more volatile areas like the emerging markets. But I wouldn’t put all of your eggs in one basket, along with equity income I would hold some corporate bonds to weather the storms of volatile periods which come very unexpectedly."
Jane Heyman (pictured right), chartered financial planner at McCarthy Taylor, says a person’s attitude to risk is far more important than their age when it comes to investing.
"Investors need to work out their objectives and their timescale. As a younger investor, the norm is to have a high exposure to risk but if they aren’t too sure of their objectives then they can do damage because they have a lack of confidence," she said. "If it goes wrong it could deter them from saving in the future so it is very important to build asset allocation over time."
"Also, with an ISA an investor may have a long-term outlook but if they have kids or need to buy a house then it is available."
Preparing for retirement
As investors near retirement, many will be tempted to rush out of their riskier assets and turn to more defensive holdings – such as fixed income – in order to preserve the capital they think they will need during their twilight years.
However, experts say completely selling out of equities is the wrong move.
Chris Spear (pictured), managing director of Spear Financial Limited, said: "In many respects, asset allocation does have a place but you need to make sure you don’t lose out on long-term growth. Investors need to be taking risk, even if they are approaching retirement." "Some pensions automatically move your assets as you approach retirement. In 2007, if you had moved out of equities into bonds you would have done very well. However, if you had done the same thing in 2009 you wouldn’t have done yourself any favours as you would have been selling at the bottom of the market."
Connolly adds that investors need to think about what returns they will need to fund the lifestyle they want in retirement, and rushing out of risk too quickly can mean they will not achieve those goals.
"If you have the view that you want to be retiring at 65, 66 or 67, you want to be gradually taking on more fixed income assets – but don’t get rid of all your equities. You want to be reducing risk, not getting rid of it all together," Connolly said.
Lowcock echoes Connolly and says it should be a rule of thumb for investors to increase their bond exposure each year they get older.
"However, when constructing a portfolio you need to work out your attitude to risk. I’m a strong believer in equity income as it is one of the best ways to achieve long-term growth on your capital; I don’t think there is a short-cut to investing," he said.
Heyman adds that investors saving for the medium- to long-term should take on a medium level of risk. She says her firm is currently allocating roughly 80 per cent of its portfolios to equities because that is the area with the highest growth potential.
"We do like fixed income, but at the moment there is a realistic danger of gilts against corporate bonds and these could lose you money over the longer term; so it is all about keeping your asset allocation dynamic," she said.
Retirement
"If you hold too much fixed income then the value of your money could drop, so being invested in the stock market is still a good idea when you retire," Connolly (pictured) said.
"All in all, you need a diversified portfolio for your retirement so I would say something like a 50/50 split between equities and bonds, with a bit of property thrown in there."Safe-haven investments, such as gilts and US Treasuries, are an obvious place to turn for investors looking to preserve their hard-earned money in retirement, but Lowcock says this is not all they should be thinking about.
"Retirement doesn’t just mean you buy gilts either; it all depends on the price of the asset at the time. If you had bought gilts last year they would be yielding 1.3 per cent, if you had bought them in 2011, you would have a yield of around 4 per cent and they are now yielding just over 2 per cent."
"They are just too volatile at the moment."
"What you are looking to do is beat inflation, but if you were 65 and held 65 per cent of your portfolio in gilts you won’t be able to achieve that at the moment."
"I would still advocate equity income at that age but instead of reinvesting it, just take it out," he said.
Spear added: "I ask myself the question, ‘would I do this for myself or for my mum?’, so you need to be careful with retirement models. For example, at the moment gilts’ costs are high and they are yielding little so that isn’t the safe haven asset it used to be."